Streaming video giant Netflix (NFLX) - Get Report has become "too cheap to ignore" and is a buy down to the Sept. 24 low of $252.28. Then add to this position on weakness to its "reversion to the mean" at 221.48.
A stock is technically "too cheap to ignore" when its weekly slow stochastic reading falls below 10.00 on a scale of 00.00 to 100.00, which happened this week.
Netflix has had an extremely volatile ride since setting its all-time intraday high of $423.20 back on June 21, 2018. From this high, the stock declined in a 45% bear market to its Dec. 26 low of $231.23. From this low, the stock had a bull market gain of 66% to its 2019 high of $385.99 set on May 1. With the stock in bear market territory 31.8% below this high, it's become "too cheap to ignore" on its weekly chart.
The stock crash followed its earnings report released on July 17. The stock beat earnings-per-share estimates for the sixth consecutive quarters, but the company posted a net add of 2.7 million subscribers when Wall Street estimates called for 5 million. The competition and Netflix have been shuffling popular streaming rights. Netflix lost "Friends" and "The Office" but picked up "Seinfeld", known as "a show about nothing." Here's the story from the Sept. 16 New York Post.
Netflix closed Thursday at $263.31 down 1.6% year to date and in bear market territory 31.8% below its May 1 high of $385.99. The stock is still 13.9% above its Dec. 26 low of $231.23. The stock is not for value investors as its P/E ratio is elevated at 99.84 and the company does not offer a dividend, according to Macrotrends.
The Daily Chart for Netflix
Courtesy of Refinitiv XENITH
The daily chart for Netflix shows the volatile ride since the stock set its all-time intraday high of $423.20 on June 21, 2018. The chart shows that the stock is consolidating the 45% bear market to the Dec. 26 low of $231.23. Dec. 26 was a positive daily "key reversal" as the Dec. 26 close of $253.67 was above the Dec. 24 high of $250.65. Thus, 2019 began with a technical buy signal. The year began with an annual value level of $217.12 which has not been tested. The semiannual pivot for the second half of 2019 was set at $364.99, which failed to hold at the July 17 close just before the earnings were released. The gap lower on July 18 was clearly below its 200-day simple moving average, which accelerated the downside to the Sept. 24 low of $252.28.
The Weekly Chart for Netflix
Courtesy of Refinitiv XENITH
The weekly chart for Netflix is negative but oversold, with the stock below its five-week modified moving average of $292.96. The stock is above its 200-week simple moving average or "reversion to the mean" at $221.48, which is the next buy level. The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 9.56, down from 10.51 on Sept. 20. The reading is well below the oversold threshold of 20.00 and the reading below 10.00 makes the stock "too cheap to ignore" technically.
Trading Strategy: Buy an initial position down to its Sept. 24 low of $252.28 and add to the position on weakness to the "reversion to the mean" or 200-week simple moving average at $221.48. Reduce holdings on strength to the 200-day simple moving average at $335.13.
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How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play.
The weekly level changes each week. The monthly level changes at the end of each month, the latest on Aug. 30. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to Use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.